FELE

Franklin Electric Co., Inc. (FELE)

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Industry: Consumer Durables
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Franklin Electric (FELE)

Q1 2013 Earnings Call

April 30, 2013 5:00 pm ET

Executives

Patrick Davis

R. Scott Trumbull - Chairman and Chief Executive Officer

John J. Haines - Chief Financial Officer, Principal Accounting Officer, Vice President and Secretary

Gregg C. Sengstack - President and Chief Operating Officer

Analysts

Joseph K. Radigan - KeyBanc Capital Markets Inc., Research Division

Michael Halloran - Robert W. Baird & Co. Incorporated, Research Division

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Franklin Electric First Quarter 2013 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded.

I would now like to introduce your host for today's conference, Treasurer, Patrick Davis. Mr. Davis, please go ahead.

Patrick Davis

Thank you, Charlotte, and welcome, everybody, to Franklin Electric's First Quarter 2013 Earnings Conference Call. With me today are Scott Trumbull, our Chairman and CEO; John Haines, our CFO; Robert Stone, SVP and President, International Water Systems; and Gregg Sengstack, President and COO. On today's call, Scott will review our first quarter business results, and then John will review our first quarter financial results. When John is through, we will have some time for questions and answers.

Before we begin, let me remind you that any forward-looking statements contained herein, including those relating to market conditions or the company's financial results, costs, expenses, expense reductions, profit margins, inventory levels, foreign currency translation rates, liquidity expectations, business goals and sales growth, involve risk and uncertainties. These risk and uncertainties include, but are not limited to, general economic and currency conditions, various conditions specific to the company's business and industry, new housing starts, weather conditions, market demand, competitive factors, change in the distribution channels, supply constraints, effect of price increases, raw material costs, technology factors, integration of acquisitions, litigation government and regulatory actions, the company's accounting policies and future trends and other risk which are detailed in the company's SEC filings and are included in Item 1A of Part I of the company's annual report on Form 10-K for the fiscal year ending December 29, 2012, Exhibit 99.1 attached thereto, and in Item 1A of Part II of the company's quarterly reports on Form 10-Q.

These risks and uncertainties may cause actual results to differ materially from those indicated by the forward-looking statements. All forward-looking statements made herein are based on information currently available, and except as required by law, the company assumes no obligation to update any forward-looking statements.

I will now turn the call over to our Chairman and CEO. Scott?

R. Scott Trumbull

Thank you, Patrick. I'm pleased to report that during the first quarter, our earnings per share after non-GAAP adjustments were $0.33, an increase of 10% compared to the first quarter prior year and a record for any first quarter in the company's history. Our revenues increased by 10% overall compared to the first quarter of prior year, and our organic sales growth, excluding both acquisitions and foreign exchange, was 6%. In addition, our gross profit and operating income margins continue to improve on a year-over-year basis, increasing by 40 basis points.

While our Water business achieved solid gains, our Fueling business was our star performer. Fueling Systems represented 21% of our consolidated sales during the first quarter. Our overall Fueling revenues increased by 25% compared to the first quarter prior year, while the organic sales increase was 17%. Essentially, all of this organic sales increase occurred in developing regions, where filling station owners are continuing to convert from suction pumping systems to the Franklin pressure pumping system in order to transfer gasoline from their underground tanks to the dispensers.

While about 95% of the 175,000 filling stations in the U.S. have already made this conversion, we estimate that only about 25% of the 300,000 stations in the developing world have converted. So we anticipate that our sales will continue to benefit from this conversion in the developing regions for the foreseeable future. This is particularly encouraging because when a station owner converts to our pressure pumping system, it opens the door for us to sell our pipe, containment and leak detection products as well because these products are specifically designed to enhance the overall performance of our pressure pumping system.

The integration of Flex-ing Incorporated, the Texas-based producer of filling station hardware products, that we purchased in the fourth quarter last year, is proceeding on schedule. We'll have all Flex-ing manufacturing consolidated into our Madison, Wisconsin plant by the third quarter this year. All Flex-ing sales have been already integrated. Our Fueling team is also in the process of opening a new distribution center in Australia to better serve our customers there. It should be open in the third quarter this year.

Our overall Water Systems sales increased by 7% compared to the first quarter prior year and increased organically by 4% during the quarter. Our Water Systems business in the U.S. and Canada represented 38% of our consolidated sales and grew by about 12% compared to the first quarter of prior year. Excluding acquisitions and foreign exchange, our organic sales in the U.S. and Canada were flat to prior year. Our sales of groundwater and wastewater pumps in the U.S. residential market increased by 5%. Our sales to the irrigation and industrial market increased by about 12%. But these gains were partially offset by lower sales of mobile pumps used in the upstream oil and gas market.

Sales of Cerus Industrial, the drive and control business that we acquired during the third quarter last year, increased by 13% in the key pump channel compared to their pre-acquisition sales during the first quarter of prior year. We're in the process of conducting training seminars across the country for our sales force, distributors and installing contractors on the Cerus product line. The reception has been excellent, and we anticipate continued growth as we move the Cerus product line through the Franklin Electric distribution channels. We are changing the name of Cerus Industrial to Franklin Control Systems, and we are doubling our manufacturing floor space in Hillsboro, Oregon to create additional capacity for these products.

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